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Shiller Data Question Housing Revival Power

Study looks at role of buyer expectations in house prices.

Don’t bet the house on a robust revival of the U.S. property market, says the Yale University professor who predicted the bursting of the dot-com and subprime-mortgage bubbles.

There is no “unambiguous” sign of a strong recovery in the market, Robert Shiller and fellow economists Karl Case and Anne Thompson say in a paper published this week by the National Bureau of Economic Research. The study seeks to shed light on the role buyer expectations play in house prices, an angle the authors say has been ignored in analyzing the housing slump.

The results of their work, entitled “What Have They Been Thinking? Home Buyer Behavior in Hot and Cold Markets,” are based on the responses of almost 5,000 recent homebuyers in four cities to regular mail surveys over the past 25 years.

The answers to the latest questionnaire indicate that while perceptions of short-term price direction have turned positive, long-term expectations continue to weaken.

The upshot for Shiller and his colleagues is that while “a recovery may be plausible, and home prices have been rising fairly strongly in recent months, we do not see any unambiguous indication in our expectations data of sharp upward turning point in demand for housing that some observers, and media accounts, have suggested.”

Shiller’s views carry weight: He forecast the end of the Internet bubble in his 2000 book “Irrational Exuberance.” He said in a second edition in 2005 that the U.S. housing market had undergone the biggest speculative boom in U.S. history. The Arthur M. Okun professor at Yale, he’s based in New Haven, Connecticut, while Case is professor emeritus at Wellesley College in Massachusetts. Thompson is an economist at McGraw-Hill Construction in Boston.

Case and Shiller are also the creators of a key U.S. real-estate benchmark, the S&P/Case-Shiller index of property values in 20 cities. This week the index showed home prices in the U.S. climbed more than forecast in July from a year earlier, adding to signs that housing will spur economic growth.

In reviewing a quarter-century of data, the study concludes home buyers were “very much aware” of trends in prices when they made their purchase and that there’s a “strong correlation” between how survey participants describe the market and actual price movements.

The authors found long-term price expectations have been consistently more optimistic than those for the short term across the years and locations, although the magnitude of the differences fell to 0.8 percent this year from a high of 8.3 percent in 2008.

Bloomberg News

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